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Wednesday, November 28, 2012

Oh dear, the bond buy-back has been defined as a life-or-death issue!

The Greek Finance Minister is being quoted as saying that "the bond buy-back MUST succeed!" Or else?

For all I know, the buy-back could turn out to be a huge success or a dismal failure. Only insiders can really judge that at this point. Whether success or failure, it really doesn't matter all that much. Why? For mathematical reasons. An interest rate reduction on 100% of Greece's debt brings much more than the elimination of interest (because the debt was reduced) on, say, 10% of the debt. It's normally smart to focus on what gives you the greatest leverage.

To be sure: I hope the buy-back turns out a success because then it would be a good deal for everyone involved!

I criticize focusing on the buy-back (and even defining it as a life-or-death issue) because it is an instrument with uncertain outcome. At this stage, one should stay away from basing an entire strategy on such instruments because in case they fail, one has once again created a totally unnecessary decision point.

It's the frequency of decision-points which makes it so difficult to devote time and energy to the real important issues. There are major decision points every quarter (Troika) and there are multiple decision points in between. Sometimes it seems that every other week a new decision needs to be taken about Greece. One secret of any restructuring is to move decision points way into the future (so that real work can be accomplished) without sacrificing short-term control over activities. It's not a science but it is difficult.

So, cool down on the bond buy-back! It will definitely bring some result, perhaps even wonderful results. But even if the results are disappointing, there is no need to fear drama. All it would mean is that the official creditors would have to do more of the right thing, i. e. bring interest rates on official debt closer to zero. They have taken a first (albeit too modest) step this week. A failure of the bond buy-back would require them to take a larger step in the right direction.

And remember: a lowering of the interest rate on official debt means that official creditors need to lend less new money in order to pay themselves interest...